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From the archiveCase study · Sep 20225 min read

The mini-budget that broke the gilt market

£45bn of unfunded tax cuts sent long-dated UK yields up 130bp in three days, exposed a leverage trap inside pension funds and forced the Bank of England to step in.

RatesFXMacroJuniorTrader desk · 5 sources

  • About £45bn a year of unfunded tax cuts, unveiled on 23 September 2022, sent the 30-year gilt yield up about 130 in three days and the pound to a record low near $1.03.

  • Rising yields triggered calls on leveraged LDI pension funds, whose forced gilt sales pushed yields higher still, until the Bank of England stepped in on 28 September.

  • The 30-year yield fell more than 100bp that day. Jeremy Hunt reversed most of the tax cuts on 17 October, Liz Truss announced her resignation on 20 October and the Bank bought only £19.3bn of gilts.

The trader’s angle

How fiscal credibility, hidden leverage and forced selling can turn a policy surprise into a market crisis within days.

30-year gilt yield, peak

5.08%

up+130bp in 3 days

Hit just before the Bank stepped in on 28 Sep. The Bank says the move was three times larger than any previous three-day move.

GBP/USD, record low

1.03

downMon 26 Sep

Sterling's weakest level against the dollar on record, hit in thin Asian trading the Monday after the budget.

Unfunded tax cuts

£45bn

a year by 2026–27

The biggest package of tax cuts in 50 years, announced without an OBR forecast.

Gilts the Bank actually bought

£19.3bn

28 Sep – 14 Oct

Up to £5bn per daily auction was on offer. The promise to buy mattered more than the buying.

A bond pays fixed coupons. If investors suddenly demand a higher return to lend to the government, existing bonds must get cheaper until their matches the new market rate. So ‘yields up’ means ‘prices down’ — and losses for anyone holding bonds.

Long-dated bonds have high : a 30-year gilt can lose close to a fifth of its value when its yield rises by one percentage point. That sensitivity is at the heart of this story.

What happened

On Friday 23 September 2022, Chancellor Kwasi Kwarteng unveiled a ‘Growth Plan’ of roughly £45bn a year in tax cuts — including scrapping the 45p top rate of income tax — to be paid for with extra borrowing. There was no accompanying forecast from the , the independent body that checks the government’s sums.

Markets gave their verdict within hours. yields jumped and the pound slid; by Monday morning had touched a record low near $1.03. By Wednesday 28 September the 30-year gilt yield had risen around 130 basis points in three trading days and briefly topped 5%.

Why it happened

Three forces collided. First, credibility: unfunded tax cuts with inflation near 10% meant more gilt supply and, potentially, higher interest rates for longer. Investors demanded a bigger to hold UK debt.

Second, policy pulling in opposite directions: the Bank of England was raising rates to cool inflation while the Treasury was stimulating demand. Markets rushed to price a much higher .

Third, and most dangerous, hidden . Many defined-benefit pension schemes used funds that held gilts and partly financed with borrowed money. As yields spiked, those positions lost value and triggered . To raise cash, funds sold the most liquid thing they owned — long-dated gilts — pushing yields higher and triggering more calls. A doom loop.

How it ripples through markets

How a budget became a pension crisis

  1. 1

    £45bn of unfunded tax cuts

    More borrowing and more inflation risk — with no independent forecast to reassure investors.

  2. 2

    Long-dated gilt yields jump

    up30y gilt yield

    Investors demand a bigger term premium and price more Bank of England hikes.

  3. 3

    LDI hedges lose value

    Leveraged gilt and swap positions fall in value as yields rise, so counterparties demand more collateral.

  4. 4

    Pension funds dump long gilts for cash

    down30y gilt price

    To raise cash for collateral calls, funds sell their most liquid asset, long-dated gilts, regardless of price.

  5. 5

    Yields spike again — the doom loop

    up30y gilt yield

    Selling pushes yields higher, which cuts the value of the hedges again, so each round of selling triggers the next round of collateral calls.

  6. 6

    The Bank of England steps in

    down30y gilt yield

    A price-insensitive buyer absorbs the forced selling and breaks the loop.

Why it mattered for traders

This was a lesson in flows beating fundamentals in the short run. Forced sellers don’t care about value; they sell because they must. Anyone who bought gilts early in the week because they ‘looked cheap’ was run over before the turn.

It also showed that a central bank can act as a backstop for one market while still tightening policy. Late in the morning of 28 September, the Bank announced temporary purchases of long-dated gilts — up to £5bn per auction for 13 working days — and postponed its planned gilt sales (). It stressed this was a financial-stability operation, not a return to . The 30-year yield fell from about 5.1% to just under 4% that day. That was a drop of more than 100bp in a day.

What happened next

The calm was conditional. As the 14 October end date approached, long-dated yields pushed back above 5% and the Bank widened its purchases to . Kwarteng was sacked on 14 October; his successor, Jeremy Hunt, reversed most of the tax cuts on 17 October and gilts rallied hard. Liz Truss announced her resignation on 20 October, after just 45 days in office.

In the end the Bank bought only £19.3bn of gilts. Regulators later required LDI funds to hold much larger buffers against yield spikes.

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Sources

An original summary written from the sources above. Figures are rounded; follow the links for the full record.

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